1997 (7) TMI 8 - SC - Income Tax

Transfer of assets by firm to company - erstwhile partners were allotted shares - ITO held that depreciation allowed to the assessee-firm in respect of the assets transferred by the firm to the said company was chargeable to tax u/s 41(2) - held that provisions of section 41(2) were not applicable - Tribunal was not right in holding that the status of the assessee was a registered firm and not that of an association of persons

Summary

Issues:
1. Taxability of depreciation under section 41(2) of the Income-tax Act, 1961.
2. Taxability of capital gains in the hands of a registered firm.
3. Application of the principle of mutuality.
4. Status of the assessee as a registered firm or an association of persons.
5. Taxability of surplus realized on sale to a limited company.
6. Entitlement to depreciation under section 34(2).
7. Liability to capital gains under section 114 of the Income-tax Act, 1961.
8. Entitlement to relief based on circulars.

Analysis:

The case involves an appeal against the judgment of the Gujarat High Court regarding the tax implications of a partnership firm transferring its assets to a limited company. The primary issues revolve around the taxability of depreciation under section 41(2) and capital gains in the hands of a registered firm. The Income-tax Officer had held that depreciation and capital gains were taxable, leading to appeals by both the assessee and the Revenue. The High Court answered various questions in favor of either the Revenue or the assessee, leading to the present appeal focusing on specific questions.

The High Court relied on a previous judgment in Artex Manufacturing Co. v. CIT and considered the application of section 41(2) in the current case. The Supreme Court noted that the High Court correctly analyzed the lack of disclosure regarding the price attributable to specific assets transferred by the firm to the company. The Court emphasized that the mere allowance of depreciation did not establish the excess amount between the price and the written down value, leading to the affirmation of the High Court's decision on this issue.

Regarding the status of the assessee as a registered firm or an association of persons, the Court upheld the High Court's decision, aligning with its previous judgment in Artex Manufacturing Co.'s case. The Court also reversed the High Court's decision on the taxability of surplus realized on sale to a limited company, ruling in favor of the Revenue based on similar reasons as in the Artex Manufacturing Co.'s case.

In conclusion, the Supreme Court partly allowed the appeal by setting aside the High Court's decision on one question while affirming the answers given on other questions. The Court ruled in favor of the Revenue on the issue of entitlement to relief based on circulars and upheld the High Court's decisions on the taxability of depreciation and the status of the assessee as a registered firm.